Analysts Bullish On Stocks Like They Were Before 2008 Crash

Equities have been in a pretty strong uptrend for about five years now, and the S&P 500 Index (along with the SPY ETF) is near all-time highs. That’s why it’s so surprising when I add up the brokerage firm “buy” recommendations on individual stocks. As stocks move higher and higher, you would expect brokers to get more and more optimistic and bolder in their predictions. However, we’re not seeing that when we gauge analyst sentiment in this way.

Analyst “Buy” Recommendations: Using all the optionable stocks in our database, I summed up the total number of analyst recommendations and calculated the percentage that were “buys.” You can see the trend in the percentage of “buys” has, for the most part, coincided with the trend in the SPY.

Since late 2011, however, the percentage of “buys” on individual stocks has declined significantly — even while stocks have continued to climb. In other words, brokers don’t seem to be getting bolder in their predictions. In fact, they seem to be getting more and more cautious.

According to our contrarian philosophy, stocks are not that vulnerable to a major pullback until investors get extremely optimistic. Therefore, we look at the above chart as a bullish indicator.

This next chart takes a longer-term perspective. You can see the euphoria that was present during the tech boom, when nearly 75% of analyst recommendations were “buys.” The percentage of “buys” has never been close to that level since, and the current trend is down, which we view as bullish.

That said, the current percentage of “buy” ratings is at about the same level it was before the 2008 crash, so a significant pullback is not impossible. Also, bear in mind that this is just one indicator we’re analyzing here.

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